I started an account with Mike Adams with an initial investment of $100,000 on December 31, 1990. Since then I have added and withdrawn funds over the years, The total withdrawals have been $9,689,266, and the total gains were $11,419,337 as of the end of the first quarter of 2022.
Over the years the value of the account has varied quite a lot. At various points it has been temporarily down between 25% and 60%. Those low points included things like the Dot.Com bust, the deep recession of 2008, and more recently the effects of the Covid pandemic, and the current nervous market.
Each of those downturns has always been followed by a very substantial rebounds, and the account has grown steadily over the years.
Mike has always taken the long view about managing our investments, and I have been very pleased with the results we have seen over the years.”
-Ron M., Client1
Stocks go up and stocks go down. The question is this: is a composite drawdown of 40-50% abnormal even in well-composed portfolios? According to studies like those done by Lionel Martinelli – no!2 It is not abnormal to have a significant drawdown from time to time. If the longer-term returns are 20+% compounded annually, then it is only natural to expect volatility of twice that amount. At AFC, some of our accounts have seen drawdowns in that range during the second quarter of 2022. However, this gives me optimism about where the accounts will be in 2023 and beyond. AFC is not special in that regard. The greatest investment managers of the 20th century, the likes of Warren Buffett, Peter Lynch, and Philip Fisher, all experienced similar times.
Every year it seems as if there are hundreds of commentators that claim to show how to get the best returns from investments. I began my career by studying what the great investment managers were doing. With a background in math, I set my definition of a “great portfolio manager” as being someone who could achieve an annualized 20% return for 25 years. In dollar terms, that means turning $10,000 into $1 million over that 25-year period.
In my study, I found hundreds of claims of exceptional returns but only a very few who had actually achieved them: Warren Buffett, Rowe Price, John Templeton, and Philip Fisher. Each and every one of them rode through the ups and the downs of the markets. As Philip Fisher said, “There is a need for patience if big profits are to be made from an investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.”
It is always more exciting to show returns that are beating the S&P 500 TR. But we have learned to take the downturns along with the upturns. Downturns like this do not scare us out of the market. What they do is provide opportunities for tax loss harvesting and efficiencies in taxable individual accounts. Those tax benefits add to client net worth by reducing taxes but do not show in performance.
For AFC clients, we have begun to harvest those tax losses. Generally, this process takes place in the fourth quarter, however if we have reached the bottom – or are close – we do not want to miss the opportunity by delaying. At AFC, the tax harvest is upon us.
Our approach at AFC is for longer-term holds and to sell gains, if possible, at long-term rates. At the same time if we can take advantage of short-term tax losses, the offset to long-term can be almost two-fold.
Of course, it is better to invest close to the low point of the drawdown like now, but we want our clients to have the extra advantage of tax efficiency when there is a drawdown.
We believe now is a great time to invest and a good time to harvest those tax losses.
1. AFC is required under the SEC Advertising Rule to disclose any compensation paid for a testimonial. There has been no compensation of any sort paid for this testimonial. However over the past 31 years Ron M and his wife have been invited to several Seattle Mariner games and several brunches.
2. Martellini, Lionel. “Toward the Design of Better Equity Benchmarks.” The Journal of Portfolio Management. Institutional Investor Journals Umbrella, July 31, 2008. https://jpm.pm-research.com/content/34/4/34.
